We maintain UNDERWEIGHT on the sector with 2020 TIV target units of 420k (-31% YoY) as we envisaged worse-than-expected impact of the Covid-19 pandemic on vehicles sales. Because of the MCO, the impact is especially severe in the 2QCY20. With the economy slowing sharply, the Malaysian Automotive Association (MAA) has lowered its TIV forecast for 2020 from the 607k units it projected in January to 400k units (-34% YoY). Following our downgrade in TIV earlier in our sector report dated 30th April 2020, we now revise calls and TPs for most of the stocks under our coverage (please refer to the table below). We believe that national marques would fare worse than non-national marques with target markets of lower to mid-income range being the most financially stressed segment. Note that, BAUTO (MP;TP: RM1.40), DRBHCOM (MP;TP: RM1.40) and UMW (MP;TP: RM1.60) have performed well since our last OP call in our strategy report dated 2nd April 2020 with share prices surging 34%, 18%, and 16%, respectively. Despite most of the economic sectors starting to re-open on 4th May 2020, the MCO is still in effect with revised measures (conditional MCO) which we believe will continue to restrict consumer spending on high value items.

Maintain UNDERWEIGHT with 2020 TIV target of 420k (-31% YoY), as we envisaged worse than-expected impact of the Covid-19 pandemic on vehicles sales, mindful that 2QCY20 is a lost quarter. This is only to be expected given that showrooms are closed during the MCO and consumers are cautious on spending on high-value discretionary spending such as vehicles, imported goods and overseas travels. Furthermore, the planned new launches for 2HCY20 could be delayed given the weak consumer sentiment, but some relief could arise from better incentives program under NAP 2020, and positive impact from BNM’s cut in the overnight policy rate (OPR) and pre-emptive measures to assist those who might be financially challenged by Covid-19 impact. Our economic research team views that the MCO to contain the outbreak will adversely impact the economy in the short term with 2020’s GDP expected to contract by 1.9%. Going forward, the final impact would depend on the outcome of containment measures and whether the movement restriction would be extended.

No sales recorded for April 2020 as MCO was extended to 3rd May 2020. All the marques’ showrooms, vehicle productions and deliveries are temporarily closed, halted and delayed for the period of 18th March till 3rd May 2020. Despite the Federal Government allowing most of the economic sectors to re-open on 4th May 2020, including showrooms, the MCO is still in effect with revised measures (i.e conditional MCO) which, together with nine states still maintaining strict MCOs, will continue to restrict consumer spending appetite on high value items in our view. Selected showrooms have been re-opened on 4th May 2020 such as Perodua, Nissan, Toyota and Honda, while Mazda is planned for next week, and Proton will gradually restart operations from May 5th , covering both sales and production Nevertheless, most assembly plants including Inokom and Proton remain closed, while a few others indicate a possible re-opening next week such as Honda and Toyota, pending approvals from authorities to comply with the new safety regulation.

Following our revision of 2020 TIV numbers in earlier report, we now revise calls and TPs for most of the stocks under our coverage. We believe that national marques would fare worse than non-national marques with their target market of lower to mid-income segment likely to suffer most financially (please refer to the table below). BAUTO (to MP from OP with unchanged of TP: RM1.40), DRBHCOM (to MP from OP with a lower TP of RM1.40 from RM1.90) and UMW (to MP from OP with a lower TP RM1.60 from RM2.70) have performed well since our last OP call in strategy report dated 2nd April 2020 with share prices surging 34%, 18%, and 16%, respectively. Our downgrade on BAUTO, DRBHCOM and UMW is premised on the weakening demand from the lower to middle-income range during the MCO period, with new launches could be postponed given the weak consumer sentiment (i.e. all-new models of Honda City, Proton X50 and Perodua D55L). We downgrade MBMR (to UP from MP with a lower TP of RM2.40 from RM2.90) as we expect lower contribution from Perodua, and SIME (to UP from MP, with unchanged TP of RM1.75) as we believe the upside is limited on weakening global demand for BMW vehicles and reduction in construction and mining activities during the outbreak. No changes for TCHONG (UP: TP: RM0.750) as we already factored in the negatives as it will continue to be impacted by the dearth of all-new models and losses on Vietnam Danang Plant with or without MCO.

Source: Kenanga Research - 5 May 2020